The Cost & Politics of Economic Inequality

There’s a Chinese proverb that goes “If the world was fair, all my fingers would be the same length”. Work that one out. Or try working out why there is so much economic inequality, and the disparities are growing. The funny thing is, if all the money in the world was distributed equally, everyone would have $10,000 a month to live on.

In 2006, a team of scholars with the United Nations University’s World Institute for Development Economics Research published the first paper to tally, for the entire world, all the major elements of household wealth, everything from financial assets and debts to land, homes, and other tangible property.

This research, based on year 2000 data, found that the richest 1 percent of the world’s adult population, individuals worth at least $514,512, owned 39.9 percent of the world’s household wealth, a total greater than the wealth of the world’s poorest 95 percent, those adults worth under $150,145 who hold, together, just 29.4 percent of the world’s wealth.

In this era of fast growing economic advancement and increased global wealth, why is economic inequality on the rise?

If you asked Americans how much of the nation's pretax income goes to the top 10 percent of households, it is unlikely they would come anywhere close to 50 percent, which is where it was just before the bubble burst in 2007…

From World War II until 1976, considered by many as the "golden years" for the U.S. economy, the top 10 percent of the population took home less than a third of the income generated by the private economy. But since then, according to Saez and Piketty, virtually all of the benefits of economic growth have gone to households that, in today's terms, earn more than $110,000 a year.

Even within that top "decile," the distribution is remarkably skewed. By 2007, the top 1 percent of households took home 23 percent of the national income after a 15-year run in which they captured more than half - yes, you read that right, more than half - of the country's economic growth.

Or changing social norms around the issue of how much inequality is socially acceptable?

In the US, UK and several other western economies, the richer-get-richer poor-get-poorer situation can be directly traced back to the Ronald Reagan and supply-side 'voodoo' economics, which Margaret Thatcher also espoused, and which called for tax cuts for the rich, services-reduction for the rest - and growth in national debt.

Concentrating so much income in a relatively small number of households has also led to trillions of dollars being spent and invested in ways that were spectacularly unproductive … And what wasn't misspent was largely misinvested in hedge funds and private equity vehicles that played a pivotal role in inflating a series of speculative financial bubbles, from the junk bond bubble of the '80s to the tech and telecom bubble of the '90s to the credit bubble of the past decade.

The biggest problem with runaway inequality, however, is that it undermines the unity of purpose necessary for any firm, or any nation, to thrive. People don't work hard, take risks and make sacrifices if they think the rewards will all flow to others. Conservative Republicans use this argument all the time in trying to justify lower tax rates for wealthy earners and investors, but they chose to ignore it when it comes to the incomes of everyone else.

It's only typical those not at the short straw of inequality have 101 justifications for it. But who ends up footing the bill?

Today children are far more likely than they were 30 years ago to remain in the socioeconomic class into which they were born...

In late March, New York State adopted its fiscal year 2012 budget where a $10 billion budget shortfall was closed by drastic cuts in education, health, and human services. Most of these cuts will have profoundly negative effects on New York's most vulnerable citizens. Some members of the state legislature and concerned citizens advocated for covering part of the shortfall by extending the "Millionaires Tax" for individuals with the highest income. Yet, the governor and legislature decided that cutting essential services for vulnerable New Yorkers and increasing the overwhelming divide between the wealthiest families and those living in poverty was the most advantageous way to balance the budget.

Last week, Mayor Bloomberg issued his executive budget for fiscal year 2012, which also includes deep cuts to programs that largely benefit our poorest citizens. Early childhood education and after-school programs will bear the brunt of the blow and stand to lose more than $75 million. As a result, 7,000 underprivileged children will be denied early education and more than 16,000 will lose their after-school program throughout the City. If these cuts are adopted, NYC's after-school system -- the largest and most comprehensive in the country -- will be slashed by a quarter. This system, which was built and championed by Mayor Bloomberg, served 85,000 children in New York City in fiscal year 2009 -- that number would be chopped to 45,000 in fiscal year 2012. -Huffington Post

The other great drain on the income of the less well off, in Emerging Markets, has been corruption.

Newsletter Signup

Contributors

Professor at Columbia University. Recipient of the Nobel Memorial Prize in Economic Sciences in 2001 & the John Bates Clark Medal in 1979. Author of "Freefall: America, Free Markets", "The Sinking of the World Economy", "Globalisation and its Discontents" & "Making Globalisation Work".

Chancellor of the Exchequer of the United Kingdom from 1992 to 2007. Prime Minister of the UK between 2007 and 2010. Inaugural 'Distinguished Leader in Residence' at New York University. Advisor at World Economic Forum

Dr Steinbock is an internationally recognized expert of the multipolar world. He focuses on international business, international relations, investment and risk among all major advanced economies and large emerging economies. In addition to advisory activities (www.differencegroup.net), he is affiliated with India China and America Institute (USA), Shanghai Institutes for International Studies (China) and EU Center (Singapore). For more, please see http://www.differencegroup.net/. Research Director of International Business at India China and America Institute (USA) and Visiting Fellow at Shanghai Institutes for International Studies (China) and the EU Center (Singapore).

Asia Pathways is a blog of the Asian Development Bank Institute (ADBI). ADBI welcomes contributions to Asia Pathways. Information on how to contribute to the blog is available at our guidelines for authors.

Located in Tokyo, Japan, ADBI is the think tank of the Asian Development Bank. Its mission is to identify effective development strategies and improve development management in ADB's developing members countries. ADBI has an extensive network of partners in the Asia and Pacific region and beyond. ADBI's activities are guided by its three strategic priority themes of inclusive and sustainable growth, regional cooperation and integration, and governance for policies and institutions.